"Ah John, do you think now is the time to enter the market?" At last week's dinner, an old friend who has been an accountant for ten years suddenly asked me this question. He has some funds and wants to take advantage of the property market adjustment to invest, but he's also afraid of 'taking the hot potato'. This is a question I get asked at least twenty times a month.
In fact, to answer the question 'When to enter the market,' you must first understand a core concept: the real estate cycle. Many people think that the property market only has two states: 'up' and 'down,' but in reality, Hong Kong's property market is like the four seasons, with its own patterns of operation. By grasping these patterns, you can make wise property decisions at the right time, rather than blindly following the crowd or missing good opportunities.
In today's article, I will use the simplest way to break down the four stages of the real estate cycle, and tell you which stage we are currently in, as well as how you should position yourself.
The Four Stages of the Real Estate Cycle: Cycling Like the Four Seasons
The property cycle is an economic concept that describes the complete cycle of the real estate market from a trough to a peak and then back to a trough. A full property cycle typically takes 15-20 years, but in Hong Kong, due to factors such as land supply and policy interventions, the cycle may be lengthened or shortened.
Phase One: Recovery Period (Spring)
This is the early stage of the housing market climbing from the bottom. The market sentiment is still pessimistic, most people are still waiting and watching, but shrewd investors have already started to enter.
Typical Features:
- Trading volume has begun to recover, but property prices are still hovering at low levels.
- Bank mortgage approvals become more lenient
- Developers are cautious in launching properties, and discounts and promotions are still plentiful.
- Media reports still focus mainly on the negative, with terms like 'real estate market winter' and 'owners selling at a loss' commonly seen.
:::tip Insider Tip The recovery period is the golden opportunity to 'get on board.' At this time, market competition is low, there is ample room for negotiation, and mortgage rates are usually at a low level. After the SARS outbreak in 2003 and the financial crisis in 2009, these were typical good opportunities to enter the market during the recovery period. :::
Practical Case: I had a client who, in early 2016 (when the property market had just stabilized after the 2015 correction), bought a two-bedroom unit in Tseung Kwan O for $6.8 million. At that time, many people were still worried about a property market crash, but he recognized the signs of recovery. By 2018, similar units had risen to over $9 million, earning more than 30% in two years.
Phase Two: Expansion Period (Summer)
This is the busiest phase of the real estate market. Housing prices continue to rise, transactions are active, and market confidence is through the roof.
Typical Features:
- Housing prices are rising rapidly, with new highs every month.
- Trading volume hits a record high, and the crowd looking at houses over the weekend is like a swarm of fish.
- Developers launching new properties and 'selling out the same day' has become the norm
- Banks are competing to offer high LTV mortgages, and mortgage interest rates are highly competitive.
- Media reports have turned positive, with arguments such as 'supply exceeds rent' and 'you should buy a house early' dominating the market.
:::warning Risk Warning The late stage of an expansion period is the most dangerous time. When even friends who normally don't care about the real estate market start discussing buying property, and even taxi drivers share their 'property speculation tips' with you, this is usually a signal that the cycle is peaking. :::
Hong Kong Property Market Example: 2017-2018 The year was a typical peak of the expansion period. At that time, the property price index soared from 280 points at the beginning of 2016 to 396 points in mid-2018 (according to the Rating and Valuation Department), an increase of over 40%. Many people "bought at the peak" during this stage and ended up being trapped after the social events in 2019.
Stage Three: Decline Period (Autumn)
The property market has begun to cool down, transaction volumes have shrunk, and housing prices have peaked and started to decline. Market sentiment has shifted from excitement to caution.
Typical Features:
- Housing prices have started to decline, but the drop is moderate.
- Transaction volume has significantly decreased, and owners have begun to 'hold the price'
- Developers slow down property launches, increase discount offers
- Banks tighten mortgage approvals, high loan-to-value mortgages decrease
- The media began to report stories such as 'the turning point in the property market' and 'owners reducing prices to sell'.
:::highlight Expert Opinion The recession period is a time to test an investor's resolve. If you entered the market at a high point during an expansion period, you must not panic sell at this time. Hong Kong's property market history shows that as long as the holding period is long enough (usually 5-7 years), you can recover your capital or even make a profit. :::
Data Analysis: 2019 From the second half of the year to early 2020, the Hong Kong property market entered a recession period. The property price index fell from a high of 396 points in May 2019 to 372 points in August 2020, a decline of about 6%. Transaction volumes shrank even more significantly, with only 52,000 residential transactions in 2019, down 28% from 2018.
Stage Four: Recession Period (Winter)
This is the lowest point of the real estate market. The market is extremely pessimistic, transactions are nearly halted, and property prices have dropped sharply.
Typical Features:
- Housing prices continue to fall, with declines of 20-40%.
- Trading volume has dropped to a historical low, with the market 'priced but not trading'
- Bank mortgage approvals are extremely strict, and cases of 'negative equity' have even appeared.
- Developers sharply cut prices to promote sales, leading to a surge in 'loss-making units'.
- The media is full of negative reports such as 'housing market collapse' and 'homeowners losing all their money'.
:::success Golden opportunity Although a period of recession is frightening, for investors with capital and courage, it is the best time to 'buy at a fair price.' Historically, after every recession, a new round of an uptrend follows. :::
Historical Review: The most severe downturn in the Hong Kong property market was from 1998 to 2003. The Asian financial crisis combined with the SARS epidemic caused property prices to plummet more than 60% from the 1997 peak. At that time, the market was in despair, but investors who entered at the bottom in 2003 had already earned more than four times their investment by 2018.
What Stage Are We Currently At? The Positioning of Hong Kong's Property Market in 2024
To determine which stage the current housing market is in, we need to analyze multiple indicators comprehensively.
Analysis of Housing Price Trends
According to the latest data from the Rating and Valuation Department, the Hong Kong property price index has been adjusting continuously for more than two years after peaking in September 2021 (index at 400 points). By early 2024, the index had fallen to around 330 points, with a cumulative decline of approximately 17.5%.
Key Observation:
- The decline has already approached the average level of historical adjustment cycles (15-20%).
- In some areas (such as the New Territories), the decline is even greater, reaching 20-25%.
- The luxury housing market has dropped significantly, while small and medium-sized units are relatively resilient.
Trading Volume and Market Sentiment
2023 The total number of residential transactions for the year was about 38,000, marking a 20-year low. This figure reflects that the market is still in a wait-and-see state, but it is not completely frozen.
Market Sentiment Indicator:
- Banks are starting to ease mortgage approvals, and some banks are offering 'high loan-to-value mortgage' promotions.
- Developers increase discounts on property launches, 'immediate purchase' promotions reappear
- The bargaining space in the second-hand market has expanded, generally allowing a 5-10% discount.
- Media reports are still mainly negative, but discussions about the 'housing market bottoming out' are starting to appear.
Policy Environment and Economic Factors
Positive Factors:
- The US interest rate hike cycle is approaching its end, and Hong Kong mortgage rates are expected to decline.
- The government has relaxed some property market tightening measures, such as adjusting the period for the additional stamp duty.
- The mainland economy is gradually recovering, which is beneficial to Hong Kong's property market.
Negative factors:
- Hong Kong's economic recovery is slow, and the unemployment rate remains high.
- The problem of population outflow continues, affecting housing demand
- Supply is increasing, and a large number of new developments will be completed in the next 3-5 years.
:::tip Expert judgment Based on the above analysis, I believe that the Hong Kong property market is currently in a transitional phase from the late stage of a downturn to the early stage of a depression. Property prices have already adjusted significantly, but market confidence has not yet fully recovered. This phase typically lasts 1-2 years, after which a new round of recovery will begin. :::
Investment Strategies at Different Stages: How to Deploy Your Property Plan
After understanding the real estate cycle, the key is to know what strategies should be adopted at different stages.
Recovery Phase: Actively Entering the Market
Suitable for: First-time homebuyers, the 'stepping-on-the-property-ladder' group, those with long-term investment plans